Trimble Stock and the Conglomerate Discount

Dictionary.com probably has the best definition of a conglomerate. It’s a corporation consisting of a number of subsidiary companies or divisions in a variety of unrelated industries, usually as a result of mergers and acquisitions (M&A). Some popular conglomerates in our dividend growth portfolio include 3M (MMM) and Johnson & Johnson (JNJ), though the latter may be planning to split up their business. Then there’s VF Corporation (VFC), another dividend champion we’re holding. VFC is a portfolio of clothing businesses resulting from M&A activities, but since they’re all in the same industry, it’s not considered a conglomerate according to our definition. Here’s why this matters.

The Conglomerate Discount

The Corporate Finance Institute published a concise easy-to-understand paper which talks about the conglomerate discount. It’s an economic theory that proposes conglomerates trade at a discount, largely because the market penalizes companies for a perceived lack of focus. From the CFI paper:

Perhaps the simplest way to understand a conglomerate discount is to understand how it is calculated. It is a discounted valuation of the stocks associated with all of the divisions/